CompanyGraph
Divides net income by shareholder equity, exposing how much profit the company generates per unit of capital that owners have invested or allowed to accumulate.
Return on equity shows how much profit the company generates for each unit of shareholder equity. Higher ROE can signal strong profitability, but very high ROE can sometimes be driven by high leverage.
Return on equity (ROE) measures the profit a company generates relative to shareholders' equity investment. This fundamental metric answers how effectively management uses shareholder capital to create returns and is central to valuation frameworks, compensation benchmarks, and financial analysis. High ROE indicates efficient capital utilisation, though context matters significantly.
The calculation:
ROE = Net Income (TTM) / Average Shareholders' Equity × 100%
For example, if a company earns $100 million with average equity of $500 million, ROE is 20%. For every $1 shareholders have invested, the company generates $0.20 in annual profit.
DuPont analysis breaks ROE into three components:
ROE = Profit Margin × Asset Turnover × Financial Leverage ROE = (Net Income/Revenue) × (Revenue/Assets) × (Assets/Equity)
This reveals whether ROE is driven by profitability, efficiency, or leverage—a crucial distinction.
Interpreting ROE levels:
- ROE > 20%: Excellent; suggests competitive advantages
- ROE 15-20%: Strong; above-average capital efficiency
- ROE 10-15%: Average; acceptable for many industries
- ROE < 10%: Below average; may indicate competitive challenges
- Negative ROE: Losses eroding equity; needs investigation
Critical caveats:
- Leverage effect: Companies can inflate ROE by taking on debt, increasing risk while boosting returns mathematically
- Negative equity: ROE is meaningless when equity is negative (accumulated losses exceed capital)
- Industry variation: Compare ROE within industries; capital requirements differ dramatically
- Buyback distortion: Share repurchases reduce equity, potentially inflating ROE without operational improvement
High ROE combined with low leverage indicates genuine operational excellence. High ROE from excessive leverage represents elevated risk. Warren Buffett famously seeks companies with consistently high ROE (15%+) achieved without excessive debt, viewing this as a sign of durable competitive advantage.
Track ROE trends over 5-10 years rather than single years. Sustainable high ROE is far more valuable than a single exceptional year driven by one-time factors.
How it relates
Net IncomeNet income is the final profit after subtracting all expenses, interest and taxes. It is the bottom line of the income statement and represents the earnings available to shareholders.÷Total Shareholders' EquityTotal shareholders' equity is the residual value of the company after all liabilities are subtracted from assets. It represents the book value belonging to the company's owners.=Return on Equity (TTM)
Where it fits
Net IncomeNet income is the final profit after subtracting all expenses, interest and taxes. It is the bottom line of the income statement and represents the earnings available to shareholders.→Return on Equity (TTM)
Return on Equity (TTM)→Profitability